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Alex B. Gray
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Alex B. Gray is the founder and editor of the Scavenger Report newsletter and the website. The Scavenger Report is a research-focused investment newsletter for the independent-minded investor. The website also contains independent research on individual... More
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  • Two Small Fries Serving Up Big Dividends
    While I do follow a limited number of stocks that trade under $1.00 per share, I will seldom write an article on such stocks unless certain criteria are met.  My primary criteria for following and writing on low-priced stocks boils down to what is behind the stock.  Most importantly there must be a real business with real assets that produce real revenues and real earnings or earnings potential.  It must be a business that has a history and is not just a startup or concept stock.

    Below are a two such stocks that not only have a real businesses, but also share the profits of those businesses with their stockholders in a big way.  These dividends are not artificially inflated due to a sudden drop in the price of the stock.  In fact, one of the stocks is trading near its 52 week high and has been paying high dividends for years.  That being said, low-priced stocks can be very volatile and are not appropriate for all investors.  Be careful to use limit orders and wait for the stock price to come to you.  Even though these businesses are real, they are small players with much larger competitors.

    Armanino Foods of Distinction (OTCPK:AMNF) engages in the production and marketing of primarily upscale Italian frozen food items.  Its products are marketed internationally and include flavored prestos, frozen pastas, sauces, spreads, focaccia and meatballs.  The company’s headquarters and production facility are located in Hayward, California.  Over the last few years the company has been growing sales and profits by developing its industrial accounts and further expanding its international presence. 

    In the third quarter of 2010 the company reported record numbers including a 10% increase in sales and a 34% increase in net income when compared to the same period in 2009.  For the first nine months in 2010 the company has net income of $0.05 per share and a trailing P/E of 12.

    The company has always been very shareholder friendly and recently paid its 41st consecutive quarterly dividend.  In addition to it regular quarterly dividend, the company will often pay a special dividend when company performance allows for it.  Including special dividends the company has paid a total of $0.0495 for a yield of approximately 7% in 2010.  Excluding the two special dividends paid in 2010, the company is yielding 4.7%.  With a clean balance sheet and continuously improving results, I see no reason for the company to make any material changes to its current dividend policy.

    The stock has had a nice run since it reported third quarter earnings on October 20th so it may be wise to wait for a pullback.  However, it may not be a substantial pullback since the company announced it expects to exceed its 2009 fourth quarter results aided by the signing of three relatively major retail accounts.  In addition, the fourth quarter retail business is seasonally strong due to sales of holiday meatballs.  The company also recently authorized a stock buyback program that should provide additional support for the stock price.

    This is a strong small company, but it competes with much larger operations including Tyson Foods (NYSE:TSN), Smithfield Foods (NYSE:SFD) and even Japanese conglomerate Mitsui & Co. Ltd (OTCPK:MITSY).

    BAB, Inc. (OTCQB:BABB) primarily franchises its restaurant concept under the Big Apple Bagels and My Favorite Muffin trade names.  The company also distributes frozen raw dough and par-baked bagels under the Jacobs Bros. Bagels name.  As of August 31, 2010 the company had 103 units in operation in 26 states.

    Revenues have been down in 2010, but the company’s profits have remained flat amid a difficult period for the restaurant sector.  Since August the company has reported record breaking and better than expected sales at two of its new café concept stores which may be an early sign that the company can begin rebuilding some sales momentum.  The company has new café concept store locations under development in Indiana, Michigan and Denver, Colorado.

    The is again a company that has shown a willingness to share profits with its stockholders and has been paying dividends for the better part of 7 years.  The company has occasionally adjusted the dividend and at times paid semi-annual and special dividends instead of the current quarterly dividend.  In early 2009, the company did cut it quarterly dividend from $0.02 to $0.01 per share as a result of lower sales and profits.  Even with the lower payout, the current yield is still over 9%.  Albeit small, the company’s balance sheet is in decent shape and it should be able to support the current dividend as long as the company remains profitable. 

    The company does face stiff competition from the likes of Einstein Noah Restaurant Group (NASDAQ:BAGL), Tim Hortons (THI) and Panera Bread Co. (NASDAQ:PNRA) which may jeopardize the ability to sustain the dividend at current levels.

    Disclosure: The author has had a long position in AMNF.PK since 2005 and a very small long position in BABB.OB.
    Nov 10 5:44 PM | Link | Comment!
  • Investing Vicariously Through Kaiser Group Holdings, Inc.
    How many times have you wished you could invest with the big boys in special situations only available to an elite few.  Imagine being able to invest with the now infamous John Paulson when he was shorting the subprime mortgage market.  Mr. Paulson made both himself and his investors very wealthy during a time of chaos for most investors.  Kaiser Group Holdings, Inc. (OTCPK:KGHI) may provide the opportunity to have a piece of that action.  I will discuss these investments after a little background on KGHI.  

    The Background

    KGHI was formed in late 2000 for the purpose of owning all of the outstanding stock of Kaiser Group International, Inc. as part of a Chapter 11 bankruptcy reorganization plan.  Through Kaiser Group International, Inc, KGHI owns 50% of Kaiser-Hill Company, LLC and 100% of Monument Select Insurance Company.  

    Kaiser-Hill Company, LLC (Kaiser-Hill) serves as the general contractor performing closure activities at the US Department of Energy’s Rocky Flats site near Denver, Colorado.  Kaiser-Hill is in the closeout phase of this project and this phase is cost reimbursable only.  Additional fees are not expected to be earned during the closeout phase.  Kaiser-Hill has been paid all fees except for a small retained amount.  In turn, Kaiser Hill has withheld approximately $3.2 million in distributions until audit and certain administrative issues are completed and resolved.  KGHI expects to receive its 50% portion of $3.2 million withheld by Kaiser-Hill.  

    Monument Select Insurance Company (Monument) is a captive insurance firm.  Monument has not issued new policies since October 1, 2000, but did form a subsidiary, MS Builders Insurance Company (MS Builders) in late 2004, to allow Monument to offer derivative captive insurance services to third party clients.  MS Builders has yet to write any policies.  

    Kaiser Group International, Inc. also has ongoing litigation related its subsidiary Kaiser Netherlands B.V. concerning a steel mini-mill it constructed for Nova Hut.  Nova Hut was awarded approximately $4.1 million by an arbitration panel.  However, KGHI does not believe Nova Hut has recourse to collect this award.   Nova Hut is actively pursuing the collection of the award.  In a separate, but related legal matter, Kaiser Netherlands B.V. was awarded a $2.6 million cash settlement in arbitration and was relieved of an obligation to pay retention to a subcontractor in the Nova Hut project.  KGHI  believes the ability to collect this settlement to be uncertain, but it is actively pursuing its collection.  Kaiser Netherlands B.V. voluntarily filed for protection under Chapter 11 of the United States Bankruptcy Code in April 2008.  These legal issues will continue to negatively impact cash flow.

    Lastly, on April 30, 2007 with $6.1 million KGHI established a Voluntary Employees’ Beneficiary Association (“VEBA”) to fund retirees’ future medical and death benefits as part of the Kaiser Group International, Inc. bankruptcy.  Once the fund has been in place for 5 years, KGHI is required to perform an actuarial analysis of the projected net present value of benefits remaining to be paid out.  If the remaining fund balance is not sufficient to pay the estimated present value of future benefits, KGHI will be required to contribute any shortfall.
    While I believe it was imperative to share this background information, it is important to note that none of the above mentioned subsidiaries are currently producing any revenue and are not my catalyst for investment.  However, they do carry some contingency issues that could negatively impact the Company’s cash and investments.  

    The Vicarious Investments

    Over the last two years, KGHI has made some potentially shrewd investment decisions to deploy its existing capital.  

    Bally Total Fitness Holding Corporation

    In July 2009 KGHI purchased, at discount, secured term loans made to Bally Total Fitness Holding Corporation (“Bally”) for $11.7 million.  KGHI converted the secured term loans to equity in September 2009.  This conversion gave KGHI ownership of approximately 10% of the common stock in Bally.  In March 2010, KGHI increased its investment in Bally $500 thousand by purchasing additional shares and warrants.  Assuming the total Bally investment represents approximately 10% of Bally, that puts a estimated market capitalization on Bally of approximately $120 million.  Considering Bally operates over 300 locations nationwide, makes this investment look very good on the surface.  For comparison purposes, Life Time Fitness, Inc. (NYSE:LTM) currently operates 86 locations and sports a market capitalization of $1.64 billion.  On the flip side, Town Sports International Holding, Inc. (NASDAQ:CLUB), which operates 109 fitness centers primarily in the northeast has a market capitalization of only $62.5 million.  These comparisons are just to give you an idea of the value the market is putting on fitness companies.  However, neither LTM or CLUB is exactly comparable to Bally as LTM tends to have larger and newer centers and CLUB only has centers in a few states in the northeast. In addition, much more research would be required to understand Bally’s current operations and financial condition since emerging from bankruptcy.   

    Paulson Gold Fund, LP

    In June 2010, KGHI invested $10 million as a limited partner in Paulson Gold Fund LP (Paulson).  This fund is run by the aforementioned John Paulson who made a killing a few years ago betting against the housing market.  While anyone can invest in gold and gold related investments, it takes a minimum of $10 million to become part of this elite partnership.  Several reports say the fund was up approximately 9% in August 2010 after dropping nearly 6% in July.  So far, September has been a very good month for gold which should bode well for the funds September performance numbers.  

    The Conclusion

    KGHI just may be your way into investments you would otherwise be excluded.  While it is too early to tell if the investments made by KGHI over the last year will bear any fruit, I do find them very interesting.  If the economy and markets improve Bally should excel if it can grow in a very competitive fitness center membership environment.  If so, it may open the door to a public offering allowing the value of the KGHI investment to be realized.  If the Fed and other countries continue to print money and pile on the debt further devaluing currencies causing long-term economic issues, the Paulson Gold Fund should provide some growth and act as a nice hedge.

    In December 2009 KGHI appointed investment banker Michael E. Tannenbaum who has been involved in the financial community for many years.  This may have and certainly should in the future, give KGHI access to more investments like Bally and Paulson.

    KGHI also invested approximately $5 million in a mutual fund that seeks long-term total return by investing in bonds and other types of credit instruments.  In addition, KGHI still has approximately $22.5 million in cash and CD’s or nearly $16 per share and a book value of $35.87 per share that should provide a floor under the stock price.  Total liabilities are negligible at only $1.226 million.

    An investment in KGHI is certainly not appropriate for all accounts, but for those wanting to take advantage of investments generally reserved for the big boys, KGHI can give your account access.  Of course, it is not without risk as expenses and a lack of revenue continue to eat away at the cash balances.  For the first six months of 2010, KGHI has reported a loss of $1.738 million.  Also, the two investments in Bally and Paulson account for nearly 43% of the $51.886 million in total assets.  If either investment has a negative outcome, it could have a material impact on KGHI and its stock price.  Also, KGHI is very thinly traded and only limit orders should be used when trading this security. 

    Disclosure: The author is long KGHI.PK at the time of this writing
    Tags: KGHI, LTM, CLUB
    Sep 27 8:41 AM | Link | Comment!
  • Buying Cash At A 35% Discount
    It is not often you can pick up cash on sale.  Especially 35% off, but that is exactly the opportunity Bexil Corporation (OTCPK:BXLC) is currently offering to potential shareholders.  BXLC currently resembles what is referred to as a Special Purpose Acquisition Company or SPAC.  Typically a SPAC is a company that goes public to raise capital with the intent to acquire an operating company.  This is not exactly how BXLC ended up looking like a SPAC.  To better understand the BXLC situation, a little company history is in order.  

    BXLC was originally Bull & Bear US Government Securities Fund, Inc. and primarily invested in government and corporate bonds.  The company changed its investment policy January 1, 2002 to a less restrictive investment criteria.  Also in January 2002, the Company announced its acquisition of 50% of York Insurance Services Group, Inc.  BXLC paid American International Group, Inc. $3 million cash and provided loan guarantees of $3 million.  In January 2004, BXLC ceased to be an investment company and became a holding company continuing to trade on the American Stock Exchange.  In April 2006, BXLC sold its 50% interest in York Insurance Services Group, Inc. for $39 million in cash.  I can’t argue with the results of that investment.  In a move to trim costs, the Company filed to delist its common stock from the American Stock Exchange and the stock was listed on the Pink Sheets shortly thereafter.  

    Since the Company received the proceeds from the York Insurance Services Group sale in 2006, it has been seeking to acquire and/or develop one or more businesses.  To date, the Company appears to be being very methodical regarding acquisition candidates as it has not materially committed any capital to an acquisition.  The Company’s acquisition parameters are as follows:
    • A proven track record with demonstrated earning power
    • A seasoned business with solid customer relations
    • Good return on equity, with little or no debt
    • Solid management
    • Audited financial statements
    • Particularly interested in a “spin-off” from a larger company.
    While this methodical approach is appreciated, time is becoming an issue as negative cash flows continue to eat into the cash balance as the Company currently does not have a source of revenue.  BXLC recently reported a net loss of $351,136 for the three months ended June 30, 2010 and a net loss of $522,003 for the six months ended June 30, 2010.  Many investors are calling for the Company to simply liquidate its assets.  However, the Company made it very clear during its June 2, 2010 conference call that it has no intention to liquidate in the short-term. 

    As of June 30, 2010, BXLC had net cash of $36,629,550 or $36.21 per share.  With the last trade of the shares and current bid price of $23.50, that represents a 35% discount to net cash.  The current ask price on this thinly traded stock is $25.75 representing a 29.9% discount to net cash.  

    The primary risks are the Company either continues to deplete its cash balances with continued losses or they make a poor decision for the deployment of the cash.  An investment in this Company also carries the additional risk of being a very small capitalization company whose common stock is very thinly traded.  This can make it difficult to buy or sell shares at a desired price.  There is typically a large spread between the bid and the ask price.  It is very important to only use limit orders when attempting to acquire or dispose of shares.  Only very experienced investors with a long-term time horizon should consider an investment in BXLC.

    Disclosure: Disclosure: The author is long Bexil Corporation (OTCPK:BXLC) at the time of this writing.
    Tags: BXLC
    Sep 15 4:20 PM | Link | 3 Comments
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